01-Dec-2009

Power sector reforms - global experience

[This was posted to Hasiru Usiru mailing list]Prayas has reports on their site, laying out the experience of various regions/countries in the area of power sector reforms (http://www.prayaspune.org/peg/energy_pbl.php?cat_id=1&sub_cat_id=10&#links). They provide conclusions for each region/country. They look not only at distribution but the entire electricity sector from generation onwards. In fact they give much priority to generation (makes sense since generation cost is 70% or so of total power cost). I've extracted summary/conclusion parts of the reports below form the individual reports with links to the full reports.

ASEAN---------------In the mid-to-late 1990s, several ASEAN countries initiated wide-ranging programs to reform their electricity industries. Such reform, argued its proponents, would improve the productivity of the electricity industries, and attract much needed private investment. A review of these reform experiences suggests that there is a significant disparity between the expected and actual outcomes of reform. Explanations for this disparity [tend] to be narrow, industry-centric, and ideological. This is unhelpful as it obscures the real challenges confronting the electricity industries and precludes consideration of meaningful policy prescriptions. There is a need to develop a broader perspective on electricity reform. This paper is an attempt in that direction.

[From the Epilogue].... much of the underlying arguments for reform in the region are untenable. The planners in the ASEAN expected to achieve a rather diverse and sweeping range of objectives from reform - attracting foreign investment, providing mass electrification, improving affordability, developing capital markets, and ensuring economic prosperity. There does not appear to be any compelling logic behind these expectations. For example, how does one restructure the existing (below marginal cost) tariffs and achieve price reductions? There also appears to be a general lack of understanding about the differences between the means and ends of reform. The privatization of the industry and the introduction of full competition appear to have emerged as the ends in themselves rather than the means to achieve technical and economic efficiencies. Further, the technical characteristics (for example, capacity constraints, fragmented systems, technological backwardness) and, more importantly, the socio-political contexts (for example, rural settings, institutional weakness) in the region do not appear to be positively disposed to the creation and sustenance of fully competitive and privatized electricity markets. These reforms therefore are unlikely to yield desirable outcomes.

The remedy, this author argues, resides in acknowledging the importance of the regional socio-cultural context; discarding the existing puritanical approach to reform that sees the world in 'black' and 'white' only and does not recognize the 'grey' where the multitude of humanity lives and strives, on a day-to-day basis, to carve out a dignified existence; and developing institutions and policy prescriptions that accommodate the interest of the wider citizenry in a culturally sensitive, yet responsible, manner. (Italics mine) (http://www.prayaspune.org/peg/publications/global_reform_asean_epw_066A09.pdf)

Latin American Countries & the Carribbean ------------------------------------------------------------------------------------- The main proposition of this paper is that power sector reform has made significant progress to overcome problems that plagued the pre-reform sector in LAC. But it still faces significant challenges, some of which arise because of the technological features of electricity markets, while others arise because many LAC countries lack the institutional development and the human resources implicit in the adopted models. Gains from the reform have varied. Success of the reform should be measured with a pragmatic yardstick, weighing the desirable against the feasible. ... Although the starting points and objectives were different, reforms in LAC followed the pioneering OECD countries. The possibility that OECD experience was dependent on context seems to have been given scant attention. Reform appears to have been based on ideology, which assumed that the market could be trusted to solve the problem. While some basic elements are essential, a cautious approach might have been to say that no universal model exists, and that success of sector reform depends upon the institutional setting and the timing of reform. Unless those tacit elements, crucial to success in the original, are replicated or replaced with local versions, and unless reforms are coherent across the economy, transferring a model out of context is a gamble. While blueprints, best practices, international codes and standards and harmonization may prove useful for some narrow technical issues, large-scale institutional development requires a process to discover local needs and capabilities. (http://www.prayaspune.org/peg/publications/global_reform_latin_epw_066A06.pdf)

South Africa - From State to Market & Back Again --------------------------------------------------------------------------------------------------The "standard" model of power sector reform of the past decade—vertical and horizontal unbundling, wholesale and retail competition and privatisation—has, in effect, been abandoned by South Africa, and increasingly by many other developing countries. This does not mean that governments will accept inefficient utilities. There is a still a commitment to ensure improved performance by state-owned enterprises through appropriate governance and regulation. Capital constrained countries will also open up space for private investments – mostly within the framework of a "hybrid market" where the state utility remains dominant. What remains to be seen is whether the investment mistakes of the past can be obviated and whether security of supply can be achieved at an acceptable price.(http://www.prayaspune.org/peg/publications/global_reform_sa_epw_066A08.pdf)

United Kingdom--------------------------------There was little apparent need for reform in 1987. Service was reliable, prices were in line with European countries, the industry was profitable and investment needs could be readily financed. However, there were three strong non-sector objectives that influenced the decision: generation of government revenues; widening of share ownership; and breaking trade union power. ...In 2003/04, the 'honeymoon' period for the privatised British electricity industry came to an end and the price reductions from 1987 onwards were almost wiped out in only a year. The good results up to 2002 were based on three factors:

• Good luck, particularly extremely advantageous fossil fuel markets;• A significant improvement in the performance of the British nuclear power plants; and• A transfer of resources from tax-payers to electricity consumers.

The criterion on which the reforms must be judged is whether efficient markets have been created. On this criterion, they have failed. The wholesale market is not competitive. Confidential contracts and self-dealing within integrated generator/retailers dominate wholesale purchases leaving the spot market with no liquidity and unreliable prices. The failure to develop a competitive wholesale market places the onus on the retail consumers to force competition on the industry. Large consumers can do this and have done well from liberalisation. But, these gains have come at the expense of small consumers and, unless government strengthens regulation at the expense of markets, this exploitation will get worse. The industry is dangerously close to an oligopoly with a veneer of competition and there will be an increasing need for consumers to pay for the replacement of written off pre-privatisation assets at full price. </quote> (http://www.prayaspune.org/peg/publications/global_reform_uk_epw_066A03.pdf)

United States of America -------------------------------------------------In the 1970s, the U.S. electric utility industry was faced with rising costs and sluggish demand. Efforts at lowering costs and revitalizing the industry through competition have largely been disappointing. Consumers have not seen prices fall, except where regulators have intervened. The merchant [generating] sector has suffered a financial crisis, hurting competition in both wholesale and retail markets. Advocates for deregulation assert that minor changes to market rules and regulations will yield the benefits promised. We argue that things are not so simple. Successful deregulation requires markets to be competitive and complete, neither of which is true in the U.S. Creating competitive markets is not impossible, but doing so imposes costs on the system which may outweigh the benefits of deregulation.

Policymakers in countries (particularly developing countries) considering a competitive electricity-market model should take a hard look at the challenges faced by the United States, and think carefully about the underlying goals of electric sector reform. In particular, will competition serve as an aid or impediment to achieving the stated goals? What costs would be involved in the transition to a competitive market structure? (http://www.prayaspune.org/peg/publications/global_reform_usa_epw_066A05.pdf)